Understanding the New 1099-K Reporting Rules

The IRS has always required U.S. citizens to report all income from all sources. Knowing that individuals with side businesses may not have reported all their income, the IRS is cracking down on taxpayers who may be underreporting their income, whether it be on purpose or because of a misunderstanding of the rules.

For several years now, the IRS has required payments made to merchants through various marketplaces, payment processors (credit and debit cards), and third-party settlement organizations to be reported on Form 1099-K. The IRS then compares the 1099-K amounts to the amount reported on the individual’s or business’s tax return and follows up by correspondence or by audit if there appears to be an underreporting of income.

Before 2022, the filing threshold for 1099-Ks was reportable payment transactions during a calendar year of more than $20,000, and more than 200 transactions in that same year. Thus, entrepreneurs with a small business selling merchandise on the Internet directly or through Amazon, eBay or other online platforms may not have received a 1099-K in the past. However, the American Rescue Plan Act included a provision to reduce the reporting threshold to $600 effective in 2022. Then on Dec. 23, 2022, the IRS announced that the calendar year 2022 would be treated as a transition year for the reduced reporting threshold of $600. So, the filing threshold will remain $20,000 for one more year.

Once the reporting threshold changes to $600, which businesses are likely to receive 1099-Ks that have not in the past?

  • Individuals side businesses selling personal items on the Internet. Many of these small businesses were not generating more than $20,000 of income each year.
  • Homeowners who rent out their vacation homes through Airbnb, VRBO, and the like. The owners generally avoided 1099-Ks in the past because of the 200-transaction threshold.
  • Individuals providing delivery, babysitting, home cleaning, elder care, and other services seldom met the $20,000 threshold and have not received 1099-Ks in the past.

The 1099-K only reports gross income, and the cost of the products sold and other business expenses can be deducted to determine a merchant’s net taxable profit. Those renting vacation homes can deduct depreciation, utilities, repairs, and other expenses, while those providing services can deduct certain travel and other expenses. The net profits are subject to income tax and are generally subject to self-employment tax, including rentals where significant personal services are performed.       

Because of the new 1099-K reporting, an uptick in small business tax filings is anticipated. Keeping records of expenses becomes critical to reducing the gross income reported to the IRS. Please contact Cray Kaiser at (630) 953-4900 if you’d like to discuss how these rules may impact you.